Is the Economy Good or Bad?

Economists, analysts, and financial journalists have been wrestling with the paradox of the U.S. economy. We are living at a time of historically low confidence, high gas prices, soaring corporate earnings, and by extension, a rising stock market, and a labor market that seems to be holding up. So, is the economy good or bad? The answer is unequivocal: it depends.

There is never just one economy. The economy encompasses millions of consumers, large and small businesses as well as the government, which even after DOGE, spends trillions of dollars annually. Although much of the data can paint a positive picture of the economy from 30,000 feet in the air, many things can be true at once: some people are thriving, some are struggling, and the rest are somewhere in between.

My working theory is that the recent surge in gas prices, along with uncertainty about how AI will change the labor market have coalesced into a doom-and-gloom mood that is exacerbated by social media, always a possible scapegoat for negative vibes in today.

This is not to say that financial pressure does not exist, for some, it does. The recent surge in gas prices comes after the post-pandemic increase in prices. For lower, and middle-income consumers, the current situation has meant that they are pulling back on big-ticket items like large appliances and focusing on staples, groceries, and convenience items. Some of these folks are forced to borrow to make ends meet, either through credit cards or buy now, pay later installment loans.

Retailers sense the shift. Walmart’s CFO noted that lower-income consumers are “more budget conscious and perhaps navigating financial distress.” In response, the company has slashed prices on more than 7,200 products, a 20 percent reduction from a year ago. Grocery store chain Kroger is rolling out its largest strategic price-cutting initiative in years, targeting thousands of items. Yet, as I write, the U.S. stock market is hovering near all-time highs, so what gives?

U.S. companies have endured and have adapted to four seismic events over the past five years: the Pandemic reopening inflationary surge, culminating in 9 percent annual inflation; the Russian invasion of Ukraine, which resulted in gas prices rising to a nominal high of $5.016 per gallon in June 2022; the “Liberation Day” announcement of Trump tariffs, which injected massive uncertainty into global economic trade; and the Israeli-American attacks on Iran, which effectively closed the all-important Strait of Hormuz. The nimbleness of companies in the face of these events has been impressive and has propelled the U.S. economy and stock market.

The most recent leg up in the stock market has been powered by two catalysts of growth: corporate profits and AI. Companies across the S&P 500 have continued to post solid earnings, supported by disciplined cost-cutting (read: periodically cutting headcount or not filling jobs when an employee leaves/retires) and enough consumer spending to boost revenue.

Under the hood, the main engine of the current U.S. economy and stock market is the massive build-out of artificial intelligence infrastructure. Tech giants Microsoft, Amazon, Google, and Meta are spending hundreds of billions of dollars on AI data centers, chips, and cloud capacity. That capital expenditure flows directly into the earnings of semiconductor companies, equipment makers, and utilities, not to mention the construction companies that are doing the buildout of the brick-and-mortar facilities.

Is the economy good or bad? Consumers are spending but some are stretching, inflation has moderated but gas prices remain high, confidence has soured even as many fundamental measures remain respectable, and the stock market is rising, as corporate America delivers earnings. Whether or not the economy is good depends on who you are.